Jurisdiction clauses and Twenty20 vision

deccanThis is a sad tale about an international business venture. When the deal goes sour, and it is near impossible to recover the millions that you are owed (despite a court order in your favour), what should you do? Ah yes, sue the lawyer who advised you on the deal. He must have done something wrong, he has insurance and he is based in a jurisdiction where the legal system works.

Specifically in this case, what should your lawyer advise in relation to choice of jurisdiction in the contract? We now have some guidance from the Court of Appeal.

The case of Wright v Lewis Silkin LLP [2016] EWCA Civ 1308 (21 December 2016) was reported on BAILII this week. Mr Wright was advised by the well-known London law firm, Lewis Silkin, on a contract under which Wright was hired as the chief executive of an Indian company, Deccan Chargers Sporting Ventures Limited (DCSV). DCSV held the Hyderabad franchise of the Indian Premier League, which runs a Twenty20 cricket league across India. DCSV also had ambitious plans to create a “sports city” in India.

To err is human...

To err is human…

While this contract concerned an employment relationship, the same issue could easily have arisen in other types of international business contract, and would likely have been treated by the court in the same way.

The contract, described as Heads of Terms, included the following terms:

Severance Guarantee
In the event that TW’s employment is terminated by the Company (including as a result of a constructive dismissal) at any time, TW will receive the immediate payment (to include contractual notice entitlement and the value of then vested equity (“total package”)) of the higher of the then value of his total package or £10 million.
Law
These terms to be governed by English law.

The contract did not contain any clause stating which courts would have jurisdiction.

Later, Mr Wright was dismissed. He sued DCSV in the English courts. DCSV unsuccessfully challenged the jurisdiction of the English courts. There were other procedural difficulties. Eventually, the English High Court awarded Mr Wright the £10 million referred to above.

Mr Wright sought to enforce his award in the Indian courts, but the Indian courts are very overburdened with work. It is likely to take many years before he stands any chance of the Indian courts recognising and enforcing the English court decision.

So, he sued his solicitor. At trial he alleged that his solicitor should have advised on the following:

  1. To obtain a bank guarantee from the Indian party for the £10M.
  2. To include an exclusive English jurisdiction clause in the contract.

At trial, the judge rejected the bank guarantee point. Thank goodness! In IP Draughts’ view this was a commercially unrealistic argument, for the reasons stated at paragraph 38 of the Court of Appeal’s judgment.

On the second point, the trial judge found that the solicitor had not advised on jurisdiction and was in breach of duty for this failure.

The facts in relation to the second point are a little complicated, but can be summarised briefly as follows:

  • Mr Wright had been recommended to take business advice on the transaction from someone referred to by the parties as the “wise Indian”. The wise Indian had advised Mr Wright to ensure that disputes were resolved in England, “because …India very slow, no good, must be here”.
  • Mr Wright had wrongly assumed that the above-quoted reference to English law meant that disputes would automatically go to the English courts.
  • If the solicitor had advised on this point, he would have indicated, perfectly reasonably, there were pros and cons of including an exclusive jurisdiction clause.
  • But Mr Wright would probably have insisted on exclusive English jurisdiction in light of the wise Indian’s advice.
  • A first action was brought in the English courts for the £10M but was abandoned after DCSV challenged jurisdiction.
  • A second action was brought in the English courts and was successful (as mentioned above), despite a further challenge to jurisdiction.
  • Mr Wright argued that if he had been successful in the first action, he would have been able to bring pressure on DCSV to pay up at an earlier time. At that earlier time, DCSV was a thriving business and would not have wanted to prejudice its business by resisting payment. However, DCSV’s circumstances had changed by the time of the award of damages under the second action. It lost its franchise for Hyderabad in 2012.
  • The trial judge (in the negligence action) held there was a 20% chance that DCSV would have paid up voluntarily if the first action had been successful, and therefore held that the solicitor’s firm was liable for 20% of the £10M judgment debt, ie £2M. There were also some wasted costs in relation to the first action, of a few tens of thousands, for which the solicitor’s firm was liable.

jacksonJackson LJ, a very senior English judge, gave the lead judgment in the Court of Appeal. He dismissed the appeal on the bank guarantee point.

On the jurisdiction clause point, Jackson LJ accepted the trial judge’s view that there was a 20% chance of Mr Wright having recovered his judgment debt if the first action had proceeded. However, he disagreed with the trial judge on whether the £2M was recoverable.

Citing the Court of Appeal case of Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146; [2016] Ch 529, he held that where a solicitor owes duties concurrently in contract and in tort, the test for recovering damages should be the contractual one. Applying the principles set out in Hadley v Baxendale and subsequent English cases, he considered that the £2M damages were too remote to be recoverable, in that a reasonable person would not have had damage of that kind in mind as “not unlikely to result from the breach”. [Apologies for the double negative.]

Thus, the solicitor’s firm, Lewis Silkin LLP, was only liable for the approximately £40,000 of wasted costs that had been incurred as a result of abandoning one action and starting another.

Instinctively, this decision feels right. Mr Wright wanted English jurisdiction and he got it, despite the absence of a clause that said so. If DCSV’s challenge to English jurisdiction had been successful, a more predictable loss might have occurred. There was a risk that DCSV would have refused to include an exclusive jurisdiction clause, if asked. Litigation involves all kinds of delays. It would have been difficult to predict, at the time the contract was made, that a delay in enforcement of several months would make it much less likely that DCSV would voluntarily honour an English judgment.

This judgment prompts several thoughts for IP Draughts:

  1. Non-lawyers sometimes need to be reminded that choice of law and choice of jurisdiction are distinct points.
  2. In many or most cases, it is desirable to have both a choice of law and a choice of jurisdiction clause in the contract.
  3. It is good to get a judgment from a respected court. But if the defendant has no assets in that jurisdiction, enforcement will need to take place in the defendant’s home jurisdiction (assuming he has assets there). Is it better to get a judgment in the same court that will enforce the award? Perhaps not, as in this case.  A court decision in India would likely have taken many years as well.
  4. Even if there is no perfect solution, it is better to discuss the issue with the client and decide on something than overlook the point.

withersThe point about concurrent liability in contract and tort is an interesting one, which also arises in the context of warranties. Where a party “represents and warrants” that a fact is true, some lawyers consider that this gives the recipient of the promise a right to sue in contract or for misrepresentation (ie in tort). IP Draughts has never been comfortable with this idea, and sees little in the case law to support it, though there have been several obiter dicta. He wonders whether the principle in Wellesley v Withers points us in the opposite direction, ie that in such a situation the contractual test for damages is the one to apply. In the words of Floyd LJ in that case:

Nevertheless, I am persuaded that where, as in the present case, contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting on the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract.

 

9 Comments

Filed under Contract drafting, Legal Updates

9 responses to “Jurisdiction clauses and Twenty20 vision

  1. somewildwildlife

    Thanks Mark for the interesting digest on this case. Your point that: “It is good to get a judgment from a respected court. But if the defendant has no assets in that jurisdiction, enforcement will need to take place in the defendant’s home jurisdiction (assuming he has assets there). Is it better to get a judgment in the same court that will enforce the award? Perhaps not, as in this case. A court decision in India would likely have taken many years as well” – it also has to be carefully considered, in choosing any exclusive jurisdiction, whether a judgement issued by the courts of that jurisdiction would be recognisable in the defendant’s home jurisdiction (or other place of enforcement) – and, if yes, what additional steps, costs and delays that would necessitate. In this case, given that enforcement would clearly have to take place in India and given the wise Indian’s sage advice, I would have thought that the legal advice given to Mr Wright on the contract should have dealt carefully with the cross-jurisdictional difficulties Mr Wright could face in enforcing his contractual rights (after all what value is there in advising on a contract which cannot be enforced), including a discussion of appropriate contractual dispute resolution options. Submission of all disputes to arbitration may have been a better way through all of this (and, not inconsistent with the wise Indian’s caution!), India being a New York Convention contracting state.

    • Thanks for your thoughtful comments. Personally, I don’t know whether it would have made any difference in the Indian legal system if Mr Wright had been trying to get an arbitration award enforced in India, rather than an English court judgment. (In passing, I often hear people say that arbitration awards are more readily enforced by national courts than overseas court judgments because there is specific legislation to require the arbitration award to be enforced, but the one time I asked a US lawyer abour this in relation to recognition of an English court judgment in the US, he said it wouldn’t make any difference in practice.) Nor would I be confident that I could quickly and cheaply find someone who would provide a reliable answer to that question in relation to India.

      • somewildwildlife

        Arbitral awards are, among the 150 or so New York Convention countries, designed to be far easier to enforce than foreign court judgements – indeed in many cases court judgements of one Convention country would not be enforceable in the other Convention country at-all so arbitration in that case is the only solution. In high value/high stakes contracts where the parties are based in different countries with no established reciprocal enforceability arrangements (or even, to a lesser degree, in countries which have such arrangements), local advice on ways and means of enforcement should be taken in the country where the client is most likely to have to do that. (I say this as this is what I would do, but in the interest of balance let me just say that I haven’t noticed this to be something other commercial/contract lawyers do very often – all of this is usually kicked into the long grass for the contentious lawyers to unpick years later)

  2. This saga is really scary! The grounds for the claim of negligence are so tenuous, so distant from the events. Since when is not including an exclusive jurisdiction negligent. In some situations not naming a jurisdiction is preferable to having a jurisdiction that is not favorable to the client. What if the Indian company had insisted on Indian jurisdiction? Then the client would have been in a worse position … As they say hindsight is 20/20. It is rare that I don’t name a jurisdiction in a contract – and certainly I do not do this without discussing with the client … so maybe that is what is required of a competent attorney? To discuss it with the client? I think the general rule is that a dissatisfied client will always find something to complain about ….

  3. I’m adding this to the list of warning stories to tell my contract-drafting students. Thanks Mark.

  4. vrkoven

    I’m at a loss to understand where the contract claim comes from that suddenly trumps the negligence claim. Was there a written agreement between the firm and the client? What were the firm’s responsibilities? At a guess I would say, if there were an agreement, the responsibility would be same as if there hadn’t been, namely for the solicitor to act in accordance with prevailing professional standards, which is to say, not negligently. Thus the standard is the same either way.

    Classic American tort cases hold that a negligence defendant isn’t liable for remote, unforeseeable damages. If English law is to the same effect, then if the firm would have been liable for negligence, it should be equally liable in contract if there were not terms that differed from the negligence standard.

    The result in this case seems to me like another example of excessive formalism in how English courts analyze the law, almost as if the old forms of action were still in effect. I can see how a contract that provides details of responsibility that are different from those in tort could–though I’d want to see this stated explicitly–override what a party could obtain in a tort action (i.e. an exclusive remedy clause), but to claim that an unwritten contract or one that’s silent on the scope of duty automatically overrides a tort remedy is just pulling a rabbit out of a hat.

    • I don’t know what was going through Jackson LJ’s mind, but perhaps he was just directing himself to the appropriate standard – the contractual one – before applying it. Of course there is a contract between a solicitor and their client, whether oral or written in an individual case. And this is reinforced by rules of conduct which require a detailed, written letter of engagement.
      Always interesting to get your take, Vance, and the point about formalism is one that is familiar from discussions with Ken.
      As for accusing judges of prestidigitation, you might think that, I couldn’t possibly comment!

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